Coal plant closures could send electricity costs soaring

Results of energy auction would affect 2015 prices

May 17, 2012|By Julie Wernau, Chicago Tribune reporter

The price of electricity could spike in 2015 because of the number of coal plants closing.

Residential electricity prices are expected to spike by more than 10 percent beginning in 2015, with consumers paying between $150 and $330 a year more than this year, as coal plants, the least expensive producers of electricity, continue to close.

Analysts who follow electricity pricing will have a firmer idea Friday of how much consumers' bills will go up. It's the day the agency that manages the electric grid, known as the PJM Interconnection, will announce the results of an annual auction that reserves power three years in advance.

Think of the agency as a middleman that chooses the lowest-cost mix of power from bids offered by electricity producers fueled by coal, nuclear, wind, solar or natural gas, among others.

Winners walk away with lucrative "capacity payments," paid by consumers in their electricity bills as an incentive to invest in plants and keep them running. Losers face the prospect of shutting down. Auction results are scheduled to be released Friday afternoon.

Operators of coal-fueled plants, coal being inexpensive and abundant, emerged as big winners in the past. But this year promises to be different.

"Coal plants close, and capacity prices go up," said Travis Miller, director of utilities research at Chicago-based Morningstar. "The environmental regulations coming out of Washington right now, we think, will have a big impact on the prices realized on Friday and, ultimately, consumers' electricity bills."

This year's auction is to reserve power for 2015-2016, a federal deadline by which coal plant operators must comply with environmental rules or shut down. About 35 percent of electricity generation in this market is produced by burning coal, but 45 percent of those coal plants haven't installed pollution controls to meet regulations, according to a Goldman Sachs analysis.

That means the outmoded plants will either bid high, hoping for capacity payments that will be generous enough to cover the cost of environmental controls, analysts say, or these coal plant operators won't bid at all, making room for more expensive generators.

"Last year's auction saw a lot of new, clean generators stepping up to fill the gap left by the old dirties," said Becky Stanfield, senior energy advocate at the Natural Resources Defense Council. "This is exactly what should happen in a well-functioning market."

The implications of the auction can be illustrated by the expected jump between this year's prices and those expected for 2015. In June, consumers will pay power plant operators $16 per megawatt-day in capacity payments based on the results of an auction held three years ago. (A megawatt-day is about equivalent to the amount of electricity used by 330 homes in 24 hours.)

Miller predicts that number will jump to $140-$180 per MW-day in Friday's auction. Goldman Sachs analysts estimate even higher figures, $220-$300 per MW-day in 2015, or 14 times to 19 times this year's prices and roughly double the results of last year's auction. Consumers pay the capacity charges regardless of who provides their electricity.

There are unknowns, however, that could help lessen any impact on consumers. In addition to the capacity payments, bills reflect the cost of electricity itself. Low demand for electricity and low natural gas prices have recently driven down electricity prices. It's not known whether those factors will come into play in 2015.

There is an upside in coal plant closings, environmental and health advocates say. Fewer dirty coal plants will save millions of dollars each year in lower health care costs, they say.

"The real cost of dirty energy isn't reflected in your electricity bill. That doesn't account for the massive hit to the economy associated with heart disease, asthma attacks and hospital stays. The transition to cleaner energy is worth a lot in human or monetary terms; we are talking about health benefits that the EPA puts at upwards of $18 billion in Illinois alone," Stanfield said.

Midwest Generation's Fisk and Crawford coal plants in Chicago are slated to close by September, and Ameren Energy Resources has threatened to close its coal plants if it doesn't receive an extension to clean them up.

The closings of 319 coal-fueled generating units totaling 42,895 megawatts, about 13 percent of the nation's coal fleet, have been announced nationwide since January 2010, according to the Sierra Club.

Last year's auction for 2014-2015 was the first to see the impact of closing coal plants. Figuring in additional costs of scrubbers and other environmental upgrades for 2015, many coal-fired plant operators bid too high and found themselves out of a job. Capacity prices spiked to $126 per megawatt-day.

At least one power plant developer hopes the results of this year's power auction will work in its favor. Nebraska-based Tenaska Inc., which is seeking to build a natural gas-powered generating plant in central Illinois, is trying to strike a deal with the state Legislature to get its plant built.